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Subject: Use of Reserves Justification
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JasonB13
(Florida)

Posts:37


12/27/2017 10:54 AM  
What kind of procedures do most boards use to outline the justification of using reserves in terms of documentation and notification of homeowners? If someone were to question the use of reserves inappropriately, what would be the backup to show the judgement used in the decision?
SheliaH
(Indiana)

Posts:2281


12/27/2017 11:25 AM  
You should start by educating homeowners on what reserves are, how they're funded and why they're necessary. See if your documents address the subject - that would be a good place to start, so homeowners would understand the board is using them in accordance with the documents. Continue the education with a discussion on reserve studies - what are they, how are they prepared and how does the board use them to set the budget? In fact, if you have a reserve study coming up, you could have a special meeting where the reserve study specialist can do a presentation on his/her findings and answer questions (along with a few horror stories on what happens when associations fail to plan for repairs/replacement of major common area components like roofing).

This should eliminate a number of concerns, but the main thing you can do is perhaps set up some protocols the board works by - define a reserve component, if borrowing from reserves is allowed and if so, how soon that money should be replaced, conditions under which borrowing would be appropriate (generally, reserves should NEVER be used to pay for expenses in the operating budget - if so, you're doing something really incorrect).

Overall, be as transparent as possible - what will be repaired/replaced, when the work will be done, who will do it, how much will it cost, etc. should all be discussed in open board meetings so everyone can hear what's being done and why. That doesn't mean some people won't question the board (some people just want to nitpick or are just cheap), but if you keep homeowners informed, most of them will understand, and that's what you want. Naysayers come with the territory, but there usually aren't very many, so don't let them stop you from doing what's necessary. If they have a better idea, they're welcome to make their suggestions or offer to assist the board in research (or run for the board themselves and see if they can do a better job)

JasonB13
(Florida)

Posts:37


12/27/2017 11:32 AM  
Im asking on a case by case basis. What backup do you keep to protect yourself in case someone questions the use of reserves for something that doesn't appear necessary on the surface.
JasonB13
(Florida)

Posts:37


12/27/2017 11:32 AM  
Im asking on a case by case basis. What backup do you keep to protect yourself in case someone questions the use of reserves for something that doesn't appear necessary on the surface.
KerryL1
(California)

Posts:5749


12/27/2017 12:49 PM  
Your reserves study lists all components that may be repaired or replaced with reserves funds. If something is not in the reserves study, reserves should not be used.

Doesn't FL legislation tell you anything about this topic, Jason?
JasonB13
(Florida)

Posts:37


12/27/2017 12:53 PM  
of course it does. But judgement is involved. Can you replace something just because you don't like it? What about upgrading something that isn't broken or in need of repair or replacement? These things go on all the time. One place used reserves for new carpeting in a 3 year old building because they didn't like what the developer gave them.
BenA2
(Texas)

Posts:531


12/27/2017 1:26 PM  
Posted By JasonB13 on 12/27/2017 12:53 PM
of course it does. But judgement is involved. Can you replace something just because you don't like it? What about upgrading something that isn't broken or in need of repair or replacement? These things go on all the time. One place used reserves for new carpeting in a 3 year old building because they didn't like what the developer gave them.




Notwithstanding a state law that says otherwise, I think a board has the authority to replace and repair as they see fit. If there is a reserve study, they should try to follow it as much as possible but a reserve study can only estimate replacement and repairs. I don't think it is appropriate to use reserves unnecessarily but what is necessary is a judgement call.

I don't think it's necessary to keep documentation proving the board used good judgement, other than stating the reason for replacement/repair in the minutes.

SheliaH
(Indiana)

Posts:2281


12/27/2017 2:23 PM  
What Ben said. As I said earlier, being able to show the steps the board took is a good start, but some people will howl, no mater what you say or do. The board is responsible for using association resources like reserves in a prudent manner, which requires - judgement, which is subjective, depending on who you ask. Personally, I'd opt for spending reserves on replacement or repairs that are needed to ensure safety, the component no longer works AT ALL or it's cheaper in the long run to just replace as opposed to doing Band-Aid repairs over and over again. It's a lot like the decision making process you use (or should be using) in your own home.

Stop wringing your hands over hypotheticals - wait until someone speaks up, explain your process and see what happens. If only one person is complainant and you did your due diligence, he/she may just have to sit down and accept it. If the issue is causing some controversy, poll the homeowners and give them the options using real facts and figures. To wit - do you hate the carpeting enough to spend X amount on replacing something that's nowhere near worn out because you don't like the color or style? Or should we wait until we see fraying and bald spots everywhere from all the use and even deep cleaning won't help it look or smell better?
JasonB13
(Florida)

Posts:37


12/27/2017 3:10 PM  
Right Sheila, its always a good idea to wait until something bad happens to devise a plan. Thoughtful people prepare for all likely scenarios. This is why so many condos are so dysfunctional. If a condo board can replace anything they want claiming "judgement", then the reserve is just a big slush fund to use for whatever they want to do.
TimB4
(Virginia)

Posts:15999


12/27/2017 3:22 PM  
Posted By JasonB13 on 12/27/2017 10:54 AM
What kind of procedures do most boards use to outline the justification of using reserves in terms of documentation and notification of homeowners? If someone were to question the use of reserves inappropriately, what would be the backup to show the judgement used in the decision?




The Reserve study should identify when maintenance or replacement should be required.
Awarded contracts, minutes of meetings and financial reports would be the only other documentation we would have.
KerryL1
(California)

Posts:5749


12/27/2017 3:28 PM  
Here are the criteria per Davis-stirling.com, a CA HOA law firm site: "Spending Restrictions. Boards may not spend reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain." (Civ. Code §5510(b).)

The word "obligated" means components listed in the study.

So, again, for CA. The reserve study itself estimates the useful life (EUL) and the estimated replacement cost. A good reserves analyst knows how to make these estimates suing a variety of tools. So...the Board decides to replace a component. They will discuss it at an open meeting and, in FL Owners who attend can ask questions about it. Directors might reply as backup, "this costs $xx more than estimated because there now are more technologically advanced versions on the market." This would be in the meeting minutes.

I have to say, though, that with 11 years on my board, no owner has ever questioned the replacement costs we discuss at open meetings. I don't think many owners read the study at all, which they get online or via US mail annually. We do, though, have over 80 components, so it's a lot to read.

Here, all of the residential hallway carpeting and wall covering was replaced when the two 25-story towers were only 6 years old. The EUL was 10 years and the est. cost on the study was much lower than the actual replacement cost. But the original study had been done by the developer, and developers are notorious for under & overestimating those two factors to keep dues lower in order to sell more product faster. The Board argued that we had to have better quality carpeting that would last longer. It's now 10 y.o. and is good for another year or two. BUT, because it was so premature, it put a big hole in our reserves that took several years to fill.

As Ben points out, some of those are judgement calls, but a majority on the Board would have to agree and, in FL, anyway, owners can argue with the Board about replacing the components.

If you're worried about protecting directors in their decisions about reserves expenses, if they follow their study and practice reasonable inquiry on replacement or repairs, they shouldn't have any trouble. If you're worried, Ben, about Boards spending reserves lavishly and carelessly, Onwers would want to fans together and vote to replace as many as possible at the next election.
JasonB13
(Florida)

Posts:37


12/29/2017 5:55 AM  
Like most laws, its too vague to be useful.

For example, suppose you're pooling reserves (allowed in FL) and you have a nice kidney shaped swimming pool that is perfectly fine. The board decides to use the entire reserve fund to turn it into an 8 lane championship olympic pool, and say they are "replacing" the pool. In their "judgement" the condos needs this new pool.

so effectively, if that's the case, the reserve fund is just a slush fund for them to do anything they want.
TimB4
(Virginia)

Posts:15999


12/29/2017 7:00 AM  
Posted By JasonB13 on 12/29/2017 5:55 AM

For example, suppose you're pooling reserves (allowed in FL) and you have a nice kidney shaped swimming pool that is perfectly fine. The board decides to use the entire reserve fund to turn it into an 8 lane championship olympic pool, and say they are "replacing" the pool. In their "judgement" the condos needs this new pool.




Pooling reserves is called the cash flow method (vs. the component method).
Under the cash flow method, the Reserve is one large pot of money with the intent being that when maintenance or replacement are needed, there is enough money in the pot to cover.

Utilizing that method with the scenario you suggest, could occur. However, the funding of the reserves is designed to replace components as they are, not enlarge them. Yet, a poor board could certainly do as you describe PROVIDING the membership allows it.

The membership is the check and balance for the Board.
This is why it's important for the members to know what the board is doing and how they are doing it.
To better enable this to occur, many States enacted open meeting requirements along with better access to records. However, nobody can force the members to actually utilize those options.








Posted By JasonB13 on 12/29/2017 5:55 AM

so effectively, if that's the case, the reserve fund is just a slush fund for them to do anything they want.




No.
If that happened, the membership better be ready for special assessments to perform the maintenance or replacement of the next item, as the correct funding won't be available and they won't be available because the members allowed that to happen by not paying attention until it was too late.
JasonB13
(Florida)

Posts:37


12/29/2017 7:17 AM  
I'm not sure what color the sky is in your world, but in mine "membership" is not engaged and are largely too apathetic or too senile to grasp how their money is being used until it's all gone
TimB4
(Virginia)

Posts:15999


12/29/2017 10:32 AM  
Posted By JasonB13 on 12/29/2017 7:17 AM
I'm not sure what color the sky is in your world, but in mine "membership" is not engaged and are largely too apathetic or too senile to grasp how their money is being used until it's all gone




Then they need someone like you to educate them.


KerryL1
(California)

Posts:5749


12/29/2017 1:25 PM  
Jason, what does FL law or your own documents have to say about capital expenditures. Your hyperbolic example probably would need an vote of the owners IF your docs or FL have a limit on what the Board can spend without owner approval.

So, you're saying that even in the open board meetings where owners may speak on any agenda item in FL, all of your neighbors would sit mutely?

As a former poster here often advised: Moooooove!

JasonB13
(Florida)

Posts:37


12/30/2017 6:59 PM  
There's a limit on alterations, but not on use of the reserves. Which is why they call everything a "replacement". I think this is more a civil fiduciary issue than a legal one, the more I look into this. There's a plan in place to upgrade the building into a super luxury building, and they're systematically replacing everything using the reserves. The classic using other people's money to enact an agenda.
KerryL1
(California)

Posts:5749


12/30/2017 7:03 PM  
Please cite FL statutes on reserves and their use, if any, Jason.

And ...you are saying that many major upgrades are from reserves when they shouldn't be? Please give us 3 examples.

Are you a condo HOA?
PaiN


Posts:0


12/31/2017 8:00 AM  
Posted By JasonB13 on 12/29/2017 7:17 AM
I'm not sure what color the sky is in your world, but in mine "membership" is not engaged and are largely too apathetic or too senile to grasp how their money is being used until it's all gone




I almost thought you lived in my 'development'.


JohnC46
(South Carolina)

Posts:7760


12/31/2017 10:09 AM  
Upon advice from our attorney, our Reserve Fund is not broken down into sub-items like roofs, retention pond, etc. His advice was as such, we can spend to repair and/or replace any existing thing without any approval. We would only have issues (need approval) if we add something new and/or add to an existing thing (such as add a gazebo on the retention pond).

Remember we have literally no amenities thus I believe the advice to be sound. Our attorney says in HOA's with amenities, he does recommend a better breakdown of Reserve Fund Items.

One post concerned a swimming pool. Proposal 1 is to restore/repair it to its original condition. Proposal 2 is to modify/expand it. If Proposal 2 is costlier than Proposal 1, I would say this is an improvement and must be voted on whereas Proposal 1 would not have to be voted on.
PaiN


Posts:0


12/31/2017 10:27 AM  
ditto
RichardP13
(California)

Posts:3054


12/31/2017 11:13 AM  
A year ago, one of the associations I manage wanted to upgrade their mail boxes. We had two options, one to install cluster boxes with mail delivered to one location and the second was upgrade the mailboxes to locking ones. The upgrade was twice of that allocated in the reserves and more than 5% of the annual budgeted expenses which meant the proper procedure was tho but it to a vote of the owners.

I had a board member not wanting to get owner approval and I told them that if they went that route they would need a new management company. Long story short, the owners voted to upgrade and they also voted to maintain the further costs on their own and take it out as a reserve component which it shouldn't have been in the first place.
GenoS
(Florida)

Posts:2430


12/31/2017 2:55 PM  
Posted By JasonB13 on 12/27/2017 10:54 AM
What kind of procedures do most boards use to outline the justification of using reserves in terms of documentation and notification of homeowners? If someone were to question the use of reserves inappropriately, what would be the backup to show the judgement used in the decision?

Condo or HOA, Jason?

To use the reserves for anything other than the component(s) that the reserve funds are being set aside for is only possible with a vote of approval by the homeowners (or unit owners in a condo).

As long as the funds are being expended to repair, replace or prolong the useful life of a component, the expense is usually justified. This assumes you're in an HOA subject to the statutory reserve requirements of FS 720. Some HOAs, such as my own, pre-date the passage of FS 720 and therefore some of the reserves language does not apply unless the developer established reserves before turnover or the homeowners affirmatively elect to handle their reserves in accordance with FS 720.
JenniferB14
(Colorado)

Posts:58


01/02/2018 11:47 AM  
I’m in the process of questioning the use of Reserve funds from my HOA as well. In my case we are overfunded in our reserves per the most recent reserve study. The board decided to privately rescind the Reserve policy reportedly in a planning meeting (which clearly states the reserves are not to be used for enhancements or capital improvements) . In CO, a reserve policy is a state requirement, so until the HOA revises or amends the current policy they are bound to it and can not elect to ignore it so they can spend how they like. We also have a reserve study which details where the reserves are intended to be used. Nevertheless the board used $30K to do a landscape project at the entrance of our community out of the reserves.

CO also states surplus funds are required by statute to be returned to the homeowners or credited towards future assessments, not used in a discretionary manner. It appears in my case the board was either not well informed as to our governing documents, but also breached fiduciary duty by #1 not having the use of the funds approved as it was not an item in our budget, and our covenants require budget ratification for any assessment over 15% of the total operating budget. #2 ignoring the reserve policy #3 ignoring the reserve study.

So in our case the governing documents I think are pretty clear to provide to homeowners should they ask what the reserves are to be used for and how they are to be managed. Our board will probably be kicking themselves all the way down the courtroom as a group of us intend to peruse the misappropriation of these funds.
TimB4
(Virginia)

Posts:15999


01/02/2018 2:40 PM  
Jennifer,

If the current reserve study used a cash flow method and the previous reserve study used a component method, this could explain why the reserves may be seen as over funded.

Personally, I believe that the component method is the most prudent.
The cash flow method, in my opinion, does work for those Associations where the membership doesn't want to raise assessments.
TimB4
(Virginia)

Posts:15999


01/02/2018 2:40 PM  
Jennifer,

If the current reserve study used a cash flow method and the previous reserve study used a component method, this could explain why the reserves may be seen as over funded.

Personally, I believe that the component method is the most prudent.
The cash flow method, in my opinion, does work for those Associations where the membership doesn't want to raise assessments.
KerryL1
(California)

Posts:5749


01/02/2018 3:44 PM  
Jennifer wrote:
"The board decided to privately rescind the Reserve policy reportedly in a planning meeting (which clearly states the reserves are not to be used for enhancements or capital improvements)." Are you saying that the Board made this decisions behind closed doors? And that it opposes your governing docs and/or CO laws re: open meetings

In CA, for instance, we may not as a Board take any action in so-called planning or orientation meetings. Decisions such as your Board's would be required to be made in open meetings. I think CO has the same open meeting laws, yes?

What percent funded are your reserves per your study?? Some HOAs do have landscaping in their studies, but I take yours does not, right?

It sounds you & others will take this to court. Do you think it's possible that letters from owners to the Board, or you all speaking out at the next open meeting might persuade the Board to act differently? It'd be a lot cheaper. On the other, what if you called a special meeting of the members? We only need 5% to sign for one and then the Board must permit it. The topic could be discussed there. In fact you might be able to a have two topics the ransacking of reserves and the requirement to build giant greenhouses. OR you could call two special meetings of the members. Check your bylaws for more.

In other words, this Board seems to need to have its feet held to the fire, or be thrown out at the next election.
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